Dear Reader,

The winds of change are blowing in the vast, complex and mysterious world of global central banking. Interest rates that were kept high for a prolonged period are now beginning to fall.

Even hard-nosed central bankers focused on fighting inflation are beginning to give a more sympathetic look to growth concerns. Some are even launching anti-recession measures.

The big cue that the world was awaiting came from the US Federal reserve when it chopped interest rates by a massive 50 basis points in one go a week ago.

Some observers were expecting a quarter percentage point cut and a gradual reduction without sounding aggressive on either side. But Jerome Powell had other ideas.

One thing is for sure. That bold act by Powell alone may have cleared a major mental block facing several central bankers on the issue of rate cuts.

Even before Powell pulled a rabbit out of his hat, the European Central Bank had cut interest rates by a quarter percentage point citing falling inflation and rising growth concerns.

Of course, others like Australian Central Bank and Bank of England are in a wait and watch mode. But they aren’t far from a rate pivot. China's PBOC surprised markets with a package of monetary measures, including sizeable rate cuts.

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The big question investors back home are wondering is when rates will be cut. The Reserve Bank of India (RBI) has been acting as an anti-inflation crusader for the last 20 months — and for the right reasons.

Unrelenting in its pursuit to defeat the inflation monster and quietly but firmly reiterating a desire to not repeat past mistakes, the RBI headed by Governor Shaktikanta Das has held rates rock steady in the past two years.

The MPC has even ignored the weak resistance within the MPC against continuation of the current stance and high-rate status quo. The RBI has, numerous times, reiterated its intent to lock inflation around 4 per cent in a sustainable manner before changing the stance or rates.

But, alas, it can no longer ignore the massive rate cut cues coming from the central bank biggies on the one hand and clear signs of below-potential growth on the other. In a highly interconnected world, rate actions have cross border implications.

The RBI must cut interest rates to support growth and the earlier, the better. The real growth situation on the ground doesn’t look as rosy as inflation crusaders would like to believe.

India's economy is growing below potential. Unemployment is rising, small firms are struggling with interest payment costs and there are rising asset quality concerns and borrower overheating among small borrowers.

As Manas Chakravarty wrote in his piece a few days ago, the RBI researchers themselves vouch that  retail inflation will fall sustainably to around 4 percent from the first quarter of 2025-26.

Whether it likes or not, the big villain in the mega inflation movie — food inflation — is far beyond the control of the central bank. None other than the government’s Chief Economic Advisor V Anantha Nageswaran himself had argued that monetary policy can’t control food inflation.

As MPC member Jayanth Varma has been consistently saying, it is depressing that India’s projected growth rates for 2024-25 and 2025-26 (despite being among the highest growth rates of any large economy in the world), are significantly lower than the potential growth rate of the Indian economy, and also well below what is needed at the current stage of our demographic transition to meet the aspirations of the new entrants into the workforce.

It’s time for the RBI to shift its focus to growth.

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Dinesh Unnikrishnan
Moneycontrol Pro